Question 1

Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that came into being after the end of the year.The subsequent information should NOT be incorporated directly into the statements if the conditions causing the change in valuation:

Accepted Answer

Subsequent information that arises after year-end should not be incorporated directly into the financial statements unless the conditions causing the change in valuation existed at the balance sheet date. If the conditions came into existence after year-end, adding them to prior financial statements would not be appropriate. Therefore, choice A is the correct answer. B and C are incorrect because in both cases, the conditions existed at or before year-end. D is irrelevant because it does not relate to the timing of events.

Question 2

Management furnishes the independent auditor with information concerning litigation, claims, and assessments.Which of the following is the auditor's primary means of initiating action to corroborate such information?

Accepted Answer

The auditor should request that client management send a letter of general inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments. This is the primary means for initiating action to corroborate such information, as it allows the auditor to obtain direct and independent confirmation from the lawyers who are knowledgeable about the legal matters in question. The other choices are not as effective because they either rely on management or outside legal counsel for corroboration, or they do not involve direct communication with the relevant legal experts.

Question 3

A client has a calendar year-end.Listed below are four events that occurred after 31 December.Which one of these subsequent events might result in adjustment of the 31 December financial statements?

Accepted Answer

Settlement of a litigation for a different amount from that recorded in the accounts is a subsequent event that might result in adjustment of the 31 December financial statements as it affects the accuracy of the financial statements. The settlement amount might differ from the amount recorded initially, leading to changes in the financial statements. The other events above may not result in the adjustment of the 31 December financial statements.

Question 4

Which type of subsequent event requires consideration by management and evaluation by the auditor?

Accepted Answer

Management is responsible for identifying and evaluating subsequent events that have occurred after the balance sheet date but before the financial statements are issued. The auditor should evaluate management's assessment of such events and determine if they have a direct effect on the financial statements (requiring adjustment) or no direct effect (but requiring disclosure). Therefore, both types of subsequent events require consideration by management and evaluation by the auditor.

Question 5

Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with applicable accounting standards.Which one of the following procedures would be LEAST appropriate for this purpose?

Accepted Answer

Confirming accounts receivable that have increased significantly from the year-end date is a test of details procedure, not a subsequent events procedure. The other options listed (inquiring of management, reading board of directors meetings, obtaining a legal counsel's letter) are all appropriate procedures for identifying subsequent events.

Question 6

Which one of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?

Accepted Answer

The settlement of litigation in excess of the recorded liability would require an adjustment to the financial statements before they could be issued. This is because the recorded liability would need to be increased to reflect the actual amount paid in the settlement. The other events listed may require disclosure in the footnotes to the financial statements, but would not require an adjustment to the financial statements themselves.

Question 7

If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be:

Accepted Answer

If a contingent liability meets the criteria of being probable and the loss amount can be reasonably estimated, it must be recognized as an actual liability in the financial statements. Disclosing in footnotes is not enough and not accruing the liability is also not appropriate. Therefore, choice D is the best option.

Question 8

If the response from the client's legal representative contains a disagreement with management, the auditor should:

Accepted Answer

It is important for the auditor to seek resolution through discussion with both management and legal representative in order to understand the disagreement and any potential implications for the audit opinion. This allows the auditor to make an informed decision and potentially avoid issuing a qualified opinion. Confirming the information using alternative audit procedures would also be appropriate, but it should not be the only course of action taken by the auditor. Issuing a qualified opinion should be a last resort after all other options have been exhausted.

Question 9

An auditor performs interim work at various times throughout the year.The auditor's subsequent events work should be extended to the date of:

Accepted Answer

The auditor's subsequent events work should be extended to the date of the auditor's report since this is the date when the auditor expresses their opinion on the financial statements. The other options are not relevant in determining the extent of subsequent events work.

Question 10

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012.Which one would require an adjustment to the account balances as at 30 June 2012?

Accepted Answer

The disposal of unused equipment after the balance sheet date results in a change in the value of the assets at 30 June 2012. Therefore, an adjustment is required to reflect the decrease in the value of the asset. The other three events occurred after the audit date and have no effect on the account balances as at 30 June 2012.

Question 11

During the final review of working papers and financial statements, it is common to have the analytical procedures done by a:

Accepted Answer

The answer of During the final review of working papers...

Question 12

The audit procedures for the subsequent events review can be divided into two categories: (1)procedures normally integrated as a part of the verification of year-end account balances and (2)those performed specifically for the purpose of discovering subsequent events.Which one of the following procedures is in the first category?

Accepted Answer

C) Examine subsequent period sales and purchases transactions to determine whether the cutoff is accurate. This procedure is typically integrated as part of the verification of year-end account balances to ensure transactions are recorded in the correct accounting period.

Question 13

An auditor's decision concerning whether or not to 'dual date' the audit report is based upon the auditor's willingness to:

Accepted Answer

Dual dating is used when an auditor is willing to extend auditing procedures for a specific event that occurs after the original audit report date, without extending responsibility for other subsequent events.

Question 14

Which event that occurred after the end of the financial year under audit but prior to issuance of the auditor's report would NOT require disclosure in the financial statements?

Accepted Answer

A major drop in the quoted market price of the shares is considered a non-adjusting event as it reflects conditions that arose after the balance sheet date and does not require disclosure in the financial statements.

Question 15

The auditor's responsibility for 'reviewing the subsequent events' of a client is normally limited to the period of time beginning with the:

Accepted Answer

The auditor's responsibility for reviewing the subsequent events is from the balance sheet date until the date of the auditor's report. This is because the auditor is responsible for providing an opinion on the financial statements as of the balance sheet date, and any events occurring after that can impact the financial statements and require disclosure in the footnotes or adjustments to the financial statements. The date of the auditor's report represents the date when the auditor completed their work and is deemed the end of the audit period.

Question 16

The statement that BEST expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is that the:

Accepted Answer

The auditor's responsibility includes ensuring a proper cutoff of transactions around the balance sheet date and reviewing significant events in the subsequent period that may affect the financial statements.

Question 17

The audit procedures for the subsequent events review can be divided into two categories: (1)procedures normally integrated as a part of the verification of year-end account balances and (2)those performed specifically for the purpose of discovering subsequent events.Which of the following procedures is in the second category?

Accepted Answer

Corresponding with legal counsel would fall under the category of audit procedures performed specifically for the purpose of discovering subsequent events. Legal counsel may be able to provide information on pending litigation or other legal matters that could affect the financial statements. Choices A, B, and C are procedures that are typically integrated as a part of the verification of year-end account balances and would not necessarily reveal subsequent events.

Question 18

A specific letter of inquiry to the client's external legal counsel would include:

Accepted Answer

A specific letter of inquiry to the client's external legal counsel typically includes management's assessment of the outcome of each identified litigation, a list of litigation and claims, and a request for the external legal counsel to confirm the reasonableness of management's assessments. This comprehensive approach ensures that the auditor has a full understanding of potential legal liabilities.

Question 19

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012.Which one would NOT require an adjustment to the account balances as at 30 June 2012?

Accepted Answer

Events that occur after the balance sheet date but before the audit report is issued are only required to be adjusted if they provide additional information about conditions that existed at the balance sheet date. The destruction of inventory in a fire after the balance sheet date does not reflect the conditions of the inventory at the balance sheet date and is considered a non-adjusting event.

Question 20

The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the valuation or disclosure of the statements being audited.The auditing procedures required to verify these transactions are commonly referred to as the review for:

Accepted Answer

Subsequent events are transactions and activities occurring after the balance sheet date but before the audit report is issued. The auditor has a responsibility to review these events to determine whether they need to be disclosed or require adjustment of the financial statements.

Quiz 17: Completing the audit